In a victory for advocates who worry that the odds are impossibly stacked against consumers in some arbitral fora, the Seventh Circuit found that a class of borrowers did not have to proceed with arbitration conducted by the Cheyenne River Sioux Tribe (“Tribe”) in South Dakota “because the arbitral mechanism specified in the agreement is illusory.” Jackson v. Payday Financial, LLC, __ F.3d __, 2014 WL 4116804 (7th Cir. Aug. 22, 2014).
The plaintiffs had each borrowed money through a website and agreed to pay 139% in interest each year. Their agreements provided that any disputes would be resolved by arbitration “conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules.” The arbitrator would be a Tribal Elder or members of the Tribal Council. The agreement also provides it is governed by the laws of the Tribe.
The plaintiffs sued for violation of Illinois usury and consumer fraud statutes. The defendants moved to dismiss for improper venue, arguing that the claims had to be brought in arbitration. The district court granted the defendants’ motion. But before the Seventh Circuit would hear the appeal, it asked the district court to engage in fact finding about the Tribe’s arbitration rules and mechanisms. The district court found the Tribe had “virtually no experience in handling claims made against defendants through private arbitration” and that the Tribe appeared to have been selected in “an attempt to escape otherwise applicable limits on interest charges. As such, the promise of a meaningful and fairly conducted arbitration was a sham and an illusion.”
The Seventh Circuit reversed the district court, concluding that the plaintiffs’ claims should not have been dismissed. It reached that conclusion based on applying two different analyses.
First, it applied the rule that forum selection clauses (like the one here selecting arbitration by the Tribe) are enforceable unless “unreasonable under the circumstances.” Here, the court found the forum selection was illusory and therefore unreasonable because the Tribe “does not authorize Arbitration…does not involve itself in the hiring of …arbitrator[s], and  does not have consumer dispute rules.”
Second, the Seventh Circuit considered the enforceability of the arbitration agreement under Illinois law (which applied if the agreement’s choice of Tribal law was invalid). Under Illinois law, the court found that the arbitration agreement was unconscionable. It found it was procedurally unconscionable (despite the plaintiff’s having the right to opt out) because the plaintiffs could not have found out about the dispute resolution process and rules, since there were none. It was substantively unconscionable because the dispute resolution mechanism did not exist and any arbitrator was likely to be biased.
In response to an argument that such a finding of unconscionability was preempted under Concepcion, the court said “[i]t hardly frustrates FAA provisions to void an arbitration clause on the ground that it contemplates a proceeding for which the entity responsible for conducting the proceeding has no rules, guidelines, or guarantees of fairness.”
Finally, the Seventh Circuit rejected an argument that the dispute should at least be heard by the courts of the Tribe. (“There simply is no colorable claim that the courts of the [Tribe] can exercise jurisdiction over the plaintiffs.”) The dismissal was reversed and the case remanded to the district court for further proceedings.
In my view, the most interesting thing about this opinion is the way it differs from other opinions about arbitration agreements in payday loan documents. At least two state court decisions finding those arbitration agreements unconscionable were later reversed, based on the reasoning of Concepcion and federal preemption. That likely explains the Seventh Circuit’s focus on federal common law about forum selection clauses as an alternative basis to simple “unconscionability” under Illinois law.